Australia’s importers of petrol and diesel should consider forging long-term supply deals with exporting countries reflecting growing risks that consumers will be hit by price shocks as OPEC and its allies start to wield more control over the market for oil products.

That’s the advice from Mukesh Sahdev, head of oil trading and downstream research at consultancy Rystad Energy, who says OPEC, Russia and perhaps China look set to increasingly “manage” the supply of refined fuels as part of their strategy to keep crude oil prices high.

In controversial views that are said to have raised eyebrows in government, Mr Sahdev told a conference in Sydney that refinery closures in Australia that led to increasing reliance on imports of petrol and diesel had left the country exposed to potential price shocks as OPEC+ looked to increase its influence over fuels markets.

BP shut its Kwinana refinery in March 2021 during the COVID-19 pandemic, while ExxonMobil followed a few months later with the shutdown of its Altona refinery. That left the country with just two oil refineries – supported by a $2 billion fuel security program – and having to import more petrol, diesel and jet fuel to meet demand.

“This is very important to understand, Australia’s ability to handle oil price shocks has actually gotten worse,” Mr Sahdev said, pointing to the country’s 40 per cent increase in imports of petrol, diesel and jet fuel since the closures.

He believed that after big investments in refining capacity, OPEC, Russia and maybe China were thinking “let’s play the product market game and keep the product prices high and this will help the oil prices”.

The idea that OPEC and its allies could start to influence the global markets for fuels is a contentious one that goes against the thinking that oil products markets are too fragmented to be susceptible to such forces. It is also rejected by other market commentators such as FACTS Global Energy, which says OPEC will continue to focus on controlling the supply of crude, not the supply of refined products.

“The biggest players on the product market will be the US, with its product demand gradually declining seeking outlet for refined products in Latin America and Asia,” said FACTS chairman Fereidun Fesharaki.

He said that Korea continues to be a critical player in the products market and will assume greater importance with Singapore refining in decline due to carbon prices and government regulations on green energy. Korea will be particularly important for Australia, Dr Fesharaki said.

Meanwhile, China’s oil demand should peak before the end of this decade and it may decide to import crude and export products using its substantial refining capability, giving it also a big role in product export markets, Dr Fesharaki said. While Saudi Arabia, Kuwait and Abu Dhabi remain important fuel product exporters, their focus will be on managing the crude market and keeping prices above $US70 a barrel, he reasons.

But Mr Sahdev argued OPEC’s ability to influence fuels markets was growing, pointing to major investments in sophisticated and complex refining capability in the region, and he advised refiners and importers to be alert to the risk. Disruptions to trade routes such as the Red Sea due to attacks on tankers by Houthi rebels added to supply risks, he said.

He said the remaining Australian refiners – Ampol and Viva Energy – should focus on keeping plants as reliable as possible, while importers may need to enter into long-term supply agreements with exporters even if that meant paying a premium, to reduce the chance of price shocks that could double or triple fuel prices.

“The government … could go and give some incentives or something to them so that these guys have extra incentive to keep supply lines well oiled, especially around the months when we are vulnerable on outages,” he said.

Extracted in full from:  https://www.afr.com/companies/energy/fuel-price-shock-warning-for-australia-20240205-p5f2l0

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